Optimal filter rules for selling stocks in the emerging stock markets

Sabri Boubaker, Xuyuan Han, Zhenya Liu () and Yaosong Zhan
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Xuyuan Han: Postdoctoral Research Center, Industrial and Commercial Bank of China
Zhenya Liu: Renmin University of China
Yaosong Zhan: Renmin University of China

Annals of Operations Research, 2023, vol. 330, issue 1, No 8, 242 pages

Abstract: Abstract With the application of the optimal stopping techniques, this paper proposes a filter rule for investors in emerging stock markets. In a bull market, once the stock price falls down to the optimal filter size, investors should sell the stock to avoid massive losses. We show that the optimal filter size is a function of the historical highest price, the weights of the future returns and the current drawdown in the investor’s utility function, the characteristics of the underlying stochastic price process, and the discount rate. Out-of-sample tests verify that this filter rule is valid, and the selling signals generated by the filter rule are at the beginning of the downtrend in the most emerging stock markets.

Keywords: Finance; Filter rule; Optimal stopping; Emerging stock markets (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10479-021-04381-w

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